Capitol News
March 2011
Budget Presentation Day — The build-up to Governor Snyder’s FY 2012 budget and tax reform proposal had hinted at pensions and seniors being targeted, so Michigan. SERA Council Chair Bob Kopasz and I prepared to meet the challenge. We arrived two hours early at the Governor’s February 17 presentation to the House and Senate Appropriations and Tax Policy Committees. The place was standing room only an hour before the meeting started. We came armed with a press release pointing out why taxing our pensions is a bad idea. We distributed these in the media section and to reporters we recognized. Afterward I rounded up cameras and reporters to interview Bob and did one myself when he was doing another one. We were heard loud and clear: Hands off our pensions!
The Governor’s Budget Proposal — The Governor had two problems to address for his FY2012 budget. First was closing the $1.4 billion structural deficit (expenditures exceeding revenues) that has been solved with one-time fixes or federal stimulus funds the last several years. Second, and in keeping with his campaign promise, he proposed abolishing the Michigan Business Tax which brings in $1.8 billion a year. Thus the Governor had to find $3.2 billion in revenue through tax policy changes and spending cuts to balance the budget.
Current Senior Tax Preferences in Michigan — Currently, social security and public pension income is fully exempt from Michigan income tax. Private pension income is partially exempt from state income tax up to $45,120/single, $90,240/couple filing jointly, indexed to inflation. While every taxpayer gets a $3,700 personal tax exemption, taxpayers who are 65 or better get an additional personal exemption of $2,300/single, $4,600/couple filing jointly. Property taxes of more than 3.5 percent of household income get a maximum credit of $1,200. Senior citizens and some others receive 100 percent of any available credit, while most taxpayers get 60 percent. 476,000 senior citizens in Michigan claimed the Homestead Property Tax Credit last year. Another tax break seniors currently get is an exemption of $10,058/single, $20,115/couple filing jointly on interest, dividends, and capital gains income. These 4 exemptions or credits for pension income regardless of age and seniors 65 or older are what Governor Snyder is proposing to alter.
Tax Policy Changes — On the revenue side, the Governor proposed a 6 percent corporate income tax (CIT) only on C corporations. These are typically large corporation that issue public or private stock. He proposed abolishing entirely the Michigan Business Tax applicable to all businesses, large and small. He would freeze the individual income tax rate at 4.25 percent instead of letting it decline further from its current 4.35 percent rate. He proposes to eliminate numerous tax exemptions and credits.
The most controversial change was the proposed elimination of the tax exemption on public and private pensions. This would produce $900 million in additional tax revenues, $700 million from private pensioners and $200 million from public pensioners. He also proposed to eliminate the $2300 extra exemption for taxpayers aged 65 or better, reduce the Homestead Property Tax Credit, and eliminate the exemption for seniors’ investment income. The Governor did not propose taxing social security income.
The other controversial tax policy proposal was to abolish the Michigan Earned Income Tax Credit which helps offset state taxes paid by low-income working families. The average EITC is worth about $430 a year. As a result, an estimated 14,000 children will be pushed into poverty according to the Michigan League for Human Services. Eliminating the EITC produces about $340 million in revenue.
Seniors vs. Business Tax Effort — Under the Governor’s plan, pensioners and seniors are going to provide about 30 percent of the money the Governor needs to balance the budget and give a big business tax break. The Governor’s budget proposal would increase state government revenues from all individual income taxes by 32 percent and drop revenues from business taxes by 86 percent according to Gary Olson, recently retired Director of the Senate Fiscal Agency and current Senior Policy Fellow at Public Sector Consultants in Lansing.
The Governor explained that the number of seniors is growing in Michigan, and the number of individuals taxed is declining as a result. There are many working people with pensions that are untaxed while another working tax payer with the same total income is taxed for all income. Of the 41 states that levy an income tax, only Michigan, Alabama, Mississippi and Pennsylvania exempt pension income from taxation he pointed out. He asserted that it was simple fairness to tax equally a family of four making $50,000 a year and a senior with a similar income.
Mitch Bean, Director of the House Fiscal Agency, noted in a presentation describing the Governor’s proposal that if the proposed 6 percent CIT is instituted and future business tax credits are honored, we may have zero or negative business tax collections in Michigan. An estimated 95,000 companies would no longer have to file a state business tax return under the Governor’s proposal. The Governor’s theory is that reducing business tax liability will encourage more business activity in Michigan and stimulate the economy. Olson of Public Sector Consultants says “the link between business tax relief and Michigan’s economic activity is tenuous.”
Other proposed changes are phase-out of the $3,700 personal exemption for higher income taxpayers; elimination of the deduction of $600 for each child; eliminate most refundable and non-refundable tax credits such as the city income tax credit, public contributions credit, community foundations credit, homeless shelter/food bank credit, historic preservation credit, college tuition and fees credit, vehicle donation credit, farmland preservation credit, adoption credit, and stillbirth credit to name just a few.
The Legal Situation — Michigan Constitution, Article IX, Section 24 states: "The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby." Taxing Michigan’s state-run pensions therefore may be unconstitutional. That would include those of state government retirees, pubic school personnel, state police, judges, and legislators. Attorney General Opinion 6697 of December 18, 1991 held that a change in taxation of prospective members of the public employee retirement systems could be made, but reduction of current pensions through taxation was improper unless an equal benefit replaced it. At the budget presentation, the constitutionality question was raised, but answered with the remark that the Governor was aware of the issue but thought there was a way to solve it. Senator Rick Jones (R-Grand Ledge) has asked Attorney General Bill Schuette for another Attorney General opinion on the issue. Currently Jones opposes taxing pensions.
State Retiree Perspective — Of the nearly 50,000 state employee retirees, about 74 percent have monthly pension benefits of $2,000 or less. Thirty-five percent have monthly state pensions of $1,000 or less.
The poverty rate of seniors has been significantly reduced in the last 30-40 years because former Michigan lawmakers wisely elected not to tax social security and pensions, and to provide extra exemptions or credits for those 65 or older. Taxing older public pensioners with extremely low Social Security income and near-static pensions will be especially harmful to them. People are living so long now that even with cost-of-living adjustments to Social Security, it doesn’t keep up with the increase in the costs of prescription drugs or co-pays, medical needs not covered by Medicare, fuel, utilities, property taxes, and Medicare premium increases. Seniors have long-term-care and chore assistance costs others don’t have. With the economic downturn, many seniors are helping to support their adult children and grandchildren.
Most pensioners figured into their retirement financial calculations the fact that their Social Security and pensions would not be taxed in Michigan. It is unfair and unjust to change the tax structure for current pension recipients after retirees can no longer adjust their retirement plans. Most cannot go back to work to make up for the loss of income.
Most Michigan retirees worked and contributed to the economy here over many years. They have chosen to stay here in part because of the favorable tax climate. There are 10 states with no income tax at all, some of them with very pleasant climates. Taxing Michigan pensions is going to cause some to move out of Michigan and with them, their contributions to Michigan’s economy from their pensions, Social Security, Medicare, or savings. Moreover, it shows a lack of respect for our elders’ past contributions to the State of Michigan when a proposal is made to change the income they expected to receive in their old age.
Spending Items — In addition to the income tax changes described above, the Governor proposes rather massive funding reductions for public universities (15 percent); elimination of statutory revenue sharing payments to cities, villages, and townships which could send some of the larger cities into bankruptcy and a state take-over; a 34 percent reduction in the level of statutory revenue sharing to counties; a 6.4 percent cut in aid to K-12 local school districts just when their contribution for funding pensions is increasing from 20.7 percent to 24.5 percent of payroll.
The Governor has proposed state employee concessions of $180 million or about 8 percent of compensation. The Governor mentioned that increasing state employee’s health care premium from 10 percent to 20 percent would help in fulfilling his concession goal. Under- 65 state retirees would likely also have to pay 20 percent of health care premiums if the unions agree to this concession proposal.
On the positive side, the Governor plans to put $200 million toward the $14.5 billion liability for state retiree health care. More worrisome is his stated intention to ask for changes that would reduce how much the state has to contribute to the pension fund and financing of health care for retirees.
Other Options — As we pointed out in our media release, there are $34 billion in tax expenditures, yet Snyder’s proposal concentrates on closing tax exemptions and credits for individuals who can least afford it; seniors and the working poor. What about spreading the sales tax to some services, taxing nutritionless drinks and beer, keeping the income tax at 4.35 percent, delaying elimination of the Michigan Business Tax or at least phasing it out over several years rather than eliminating it in one year? A corporate income tax is notoriously cyclical; shouldn’t we broaden the base of our business taxes in some way? According to the non-partisan Tax Foundation, corporate income taxes range from 3.5 percent to 12 percent in the 50 states. Michigan ranks the 17th best in business taxes currently and second-best among the Great Lakes states according to the Foundation. There are many options for finding the revenues to support government in Michigan.
The House and Senate will be having hearings on the Governor’s proposed tax reform and budget in the coming weeks and months. Up to 9 Senate Republicans have announced their opposition to or discomfort with the pension tax. A Tea Party activist has announced her opposition. We should all listen to what is happening and give our legislators some feedback. The Governor’s budget and tax reform proposals are available at www.michigan.gov/snyder. The House Fiscal Agency analysis is available at www.house.mi.gov/hfa. A 4-page summary is at www.publicsectorconsultants.com.
Other News — The Governor eliminated the 15-member Parole and Commutation Board created by former Gov. Jennifer Granholm and replaced it with a 10-member Parole Board, whose members will be appointed by the director of the Department of Corrections rather than the Governor. The Civil Service Commission’s decision to extend health care benefits to “other eligible individuals” is being challenged in various quarters including the Governor’s recommendation to the legislature to overturn it. See the Insurance Report in this issue for more CSC news.
Meanwhile the House is moving HB 4159, a bill to repeal the 3-year sunset on the 3 percent state employee contribution toward retiree health care costs. The House has also passed legislation to grant Emergency Financial Managers appointed by the Governor broader powers to help failing local governments and school districts. The EFM could abrogate union contracts and strip mayors, councils, and school boards of their powers. It would also allow intervention and assistance earlier to help avoid receivership.
House Democrats have introduced a 19-bill package aiming to protect vulnerable adults (HB 4327 - 4345). The Senate Republicans have announced an intent to introduce a senior protection package of bills as well. Repeal of item pricing looks like it is going to be approved. HJR N has been introduced to abolish the Civil Service Commission.
Updated Web site — Please check out the new Michigan SERA Council Web site www.mi-sera.org under Capitol News for links to the SERA Legislative Docket, the Michigan Legislature Web site, and House and Senate members.
Editor’s note: Mary Pollock is the Lansing SERA Chapter and SERA Council’s Legislative Representative. She may be contacted at 1200 Prescott Drive, East Lansing, MI 48823-2446; Phone 517-351-7292; E-mail michigansera@comcast.net.
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